Why is Nokia Stock so Cheap?

A battle of the 5G providers is bothering investors, but there are better opportunities here.

Andrew Willis 2 February, 2024 | 4:28AM
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Key Takeaways for Nokia Stock:

  • Nokia stock NOK is trading at a significant discount to our fair value as investors weigh the impact of Ericsson ERIC’s entry into the 5G infrastructure business – but the segment’s expensive nature may be a greater concern.
  • Wireless generations have historically lasted about 10 years, but the technology is constantly evolving, meaning vendors like Nokia need to invest heavily in research and development.
  • While Nokia maintains a wireless segment, thanks to the Internet of Things, the demand for its patents should grow as devices other than handsets will require licenses. Cloud services are also a differentiator and high margin, but the segment is still relatively small.

 

Andrew Willis: From handset technology to wireless infrastructure, and then handset patents, Nokia’s most lucrative segments seem to be a bit cyclical… and that may have some investors selling.  

Meanwhile, the company is breaking that cycle by offering less-cyclical, higher-margin cloud services. The only problem is that the segment is too small relative to its larger, and less-profitable 5G infrastructure segment. Wireless towers are constantly changing, and it’s not hard to see 6- and 7G around the corner.

Nokia’s Wireless Segment is Sink or Spend

That means Nokia’s spending big to keep up – and a new provider to Western markets, Ericsson has taken some share in recent years. On the other hand, with the tight regulations, divesting from this less profitable business may just be giving a competitor more of a monopoly.

For Morningstar, I’m Andrew Willis.

bulls Nokia Bulls Say

  • The capabilities of 5G will bring a new market of customers and a longer and more expansive cycle of network spending as enterprises deploy private networks and use Internet of Things functions.
  • Nokia is taking cyclicality out of its business by moving more into cloud services and as-a service offerings that will keep greater revenue streams intact even when customers are not buying new products or upgrading networks.
  • Nokia’s intellectual property portfolio will be even more valuable with 5G, as devices other than handsets will now need licenses for its technologies.

bears Nokia Bears Say

  • Nokia’s customer base is concentrated among sophisticated communications service providers and equipment manufacturers, which yield significant buying power, limiting the company's pricing power.
  • Open RAN will further erode pricing power by allowing networks to run on generic hardware and multisourced software, taking away proprietary components from vendors.
  • The relatively short life spans for communications technology requires Nokia to continually push on R&D and come up with the best technologies to maintain its market share.

 

The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Nokia Oyj ADR3.53 USD1.15Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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